Key takeaways:
- Reduced policy uncertainty may allow investors to refocus on healthcare innovation and valuations, which remain attractive in parts of the sector.
- Advances in cancer, depression, and obesity treatments are broadening the sector’s long-term growth potential and creating opportunities across different healthcare industries.
- Active selection may help investors identify undervalued innovators, manage company-specific risks, and help offset concentration in technology-heavy portfolios.
IMPORTANT INFORMATION
Actively managed portfolios may fail to produce the intended results. No investment strategy can ensure a profit or eliminate the risk of loss.
Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.
Volatility measures risk using the dispersion of returns for a given investment.
Definitions
Active investing: An investment management approach where a fund manager actively aims to outperform a specific index or benchmark through research, analysis and investment selection.
Bariatric surgery: Surgery that supports weight loss by changing the digestive system, typically by reducing the size of the stomach or altering how food is absorbed.
Basis point (bp): One basis point equals one-hundredth of a percentage point. One basis point is 0.01%, while 100 basis points equal 1%.
Biosimilar: A biological medicine that is highly similar to an already approved biological medicine, with no clinically meaningful differences in safety or effectiveness.
Chemotherapy: The use of medicines to destroy cancer cells or slow their growth.
Clinical remission: A period in which the signs and symptoms of a disease have substantially reduced or are no longer detectable. Remission does not necessarily mean that the disease has been cured.
Diversification: A way of spreading risk by mixing different types of assets or asset classes in a portfolio, based on the assumption that they will behave differently in a given scenario.
Efficacy: The ability of a treatment to produce the intended result under controlled conditions, such as in a clinical study.
Food and Drug Administration (FDA): The US government agency responsible for protecting public health by regulating products including medicines, biological products and medical devices.
Generic medicine: A medicine developed to be equivalent to an existing branded medicine after the relevant market exclusivity or patent protection has expired.
Gross domestic product (GDP): The value of all finished goods and services produced by a country during a specified period. GDP is a broad measure of the size and health of an economy.
Health maintenance organisation (HMO): A type of health insurance organisation that provides healthcare through a defined network of doctors, hospitals and other providers.
Hedge: A strategy involving an offsetting position intended to reduce or manage investment risk and limit the probability of an overall portfolio loss.
Magnificent Seven: The seven major technology stocks: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
Mid-cap stocks: Companies with a market capitalisation within a specified middle range. Mid-cap stocks are generally perceived to offer greater growth potential than larger companies, but with some additional risk.
Most favoured nation (MFN) pricing: A pricing approach under which a buyer or market seeks terms comparable with the most favourable terms available elsewhere. In healthcare, it can refer to linking medicine prices to those available in other countries.
Pancreatic cancer: Cancer that begins in the pancreas, an organ involved in digestion and blood-sugar regulation.
Patent cliff: A period when one or more significant medicines lose patent protection, allowing generic or biosimilar competitors to enter the market and potentially reducing the original products’ revenues.
Price-to-earnings (P/E) ratio: A ratio used to value a company’s shares compared with other stocks or a benchmark index. It is calculated by dividing the current share price by earnings per share.
Remission: A period during which the signs and symptoms of a disease are reduced or no longer detectable. Remission may be partial or complete and does not necessarily mean that the disease has been cured.
S&P 500 Index: An index that indicates the performance of the stocks of the 500 largest US companies.
View transcript
Seth Meyer: Welcome to the Janus Henderson Summit in Rome. I’m joined today with Andy Acker, lead portfolio manager on our health care team. Thanks for joining me, Andy.
Andy Acker: Great to be here.
Meyer: A lot has been changing the world obviously, we’ve seen a lot of AI innovation and people talking about what’s happening on that side of the world. What seems to be left is a lot of the innovation and excitement that we’re seeing in other sectors. So maybe why should investors kind of why should they be rethinking maybe health care?
Acker: If we look back to about a year ago, in April of last year, we had Trump basically with his proclamation about tariffs and MFN (most favoured nation), and there was all kinds of overhangs in the sector, changes in FDA leadership. I think there were a lot of concerns about the sector that acted as overhangs. Fast forward a year and we’ve had resolution on all of those fronts. The FDA, although they’ve had leadership changes, has still been very active approving new therapies, 54 new drugs approved last year.
We’ve had about 300 new drugs approved in the last five years, up 150% from the number that we’re getting approved 20 years ago. Drug pricing has been resolved. We got MFN without major consequences to the companies. And tariffs have all been resolved as well, because as long as you invest back in the US, the tariffs don’t apply for the next three years.
So what we’re left with is a sector that we believe is still undervalued but also has very high levels of innovation.
Meyer: Speaking of that innovation, one of the things I love talking to you about is exactly that. It’s fun to watch you get excited about what’s what’s making you guys excited on the investing side, right. Obviously aging demographics. And everything that we’re seeing globally, what are the major trends of innovation you’re seeing in healthcare today that kind of get you and your team excited?
Acker: I think the most exciting aspect is how broad based it is. It’s not just in any one area. It’s actually quite broad. Just in the last six months, we have had three companies report the best data ever in a given disease, and that includes areas as diverse as pancreatic cancer, where we’ve just doubled overall survival versus standard chemotherapy, with a once a day pill that can reduce pain and improve quality of life.
A second area – depression. I’ve been following depression studies for three decades. We just had a company that, after a single treatment, achieved the highest levels of efficacy for depression and anxiety that we have ever seen. In fact, 45% of patients went into remission after six months, after 1 or 2 treatments.
And that’s obviously not including the amazing progress we’re seeing in obesity, where new treatments can rival, with a once weekly injection or even a once daily pill, can rival the benefits of bariatric surgery. So incredible advances that we’re seeing.
Meyer: With all that innovation, all the excitement that you’ve been talking about, one of the other topics that you talk about as well with clients is sort of the patent cliff, particularly in regards to sort of the larger pharmaceutical companies out there, which may lead to some of the discount that we’re seeing in some of the valuations, because they need to find growth somewhere. Where are you seeing that that most relevant and where is it actually showing up in in healthcare?
Acker: So we do have a major patent wave expiration wave ahead. Estimated US$200 billion of revenues from major pharma companies will be facing patent expirations and either generic or biosimilar competition in the next five years, so they don’t have enough innovation in-house to offset that. So what do they do? They go where the innovation is, which is actually small and mid-cap biotech companies.
And so we’ve seen very active M&A activity, especially recently. In fact, we’re on track for a near record year of US$300 billion in M&A transactions. We’re not buying companies because we think they’re going to be acquired, but we’re buying companies because they have real innovation that we think is undervalued by the market. And that’s generally what these companies are looking for.
Meyer: Yeah. And cash generative company looking for a way to kind of propel their growth again makes makes logical sense. So as you as you think about sort of healthcare within a broader portfolio, I think what, what has been interesting and I think when we have conversations with clients, regardless of whether they’re in Rome or wherever we happen to be, you can’t ignore AI. AI comes up. We hear about it from one what stocks are doing, what the hyperscalers are doing, Magnificent Seven however you want to describe it or what the what the fear is there. Obviously some of these sectors have really grown as a percentage of the S&P. And if an investor had not done anything with their health care weight over the past ten years, it really it would have basically been cut in half.
So many investors are actually sitting at what would be considered all time lows and weights to sectors like healthcare just because of the crowding, crowding out effect of tech. As you think about just portfolio constructions as a whole, multiple benefits to the health care sector and why you’d want it in your portfolio, maybe highlight a few for us.
Acker: So, I think when you think about it, even just four years ago, you know, healthcare is 17% of GDP in the United States. Four years ago, it was represented at 15% of the S&P. Today that’s 9%. So, if you just owned an S&P index fund or if your clients did, you now have only half the representation of healthcare as you used to.
And that’s an area I think of opportunity, because the healthcare sector now trades at a substantial discount to the market. If we look at individual sectors within the market, within healthcare even, medical technology stocks, for example, are trading at 30 year lows on their PE ratio. So, we haven’t seen this in a long time. We have seen some recovery in biotech and pharma a little bit in HMOs, but there’s still sectors and stocks within the sector that we think are significantly undervalued.
The other element is most investors are have substantial holdings in AI and technology, and that is a major risk if it doesn’t play out the way we’re hoping that it will. And I’d say healthcare is really one of the most countercyclical sectors.
So, I think it also provides a nice hedge against that heavy tech exposure that most investors have.
Meyer: Yeah, that’s great. Well thank you so much for your time, Andy. We really appreciate it. And that’s all for now from Rome.
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